On 2 May 2012 the Department for Energy and Climate Change (DECC) issued a Call for Evidence acknowledging the importance of gas to the UK's energy mix, and seeking views on the role of gas in the electricity market as decarbonisation progresses and how barriers to investment in gas-fired generation can be tackled.

Participants in the UK gas and electricity markets should consider responding to ensure their views are taken into account by the Government, before a strategy for gas generation is published, which DECC anticipates will be in autumn 2012.

  1. Gas no longer to be left out in the cold

One of the concerns voiced by gas market participants in relation to the Government's proposals for electricity market reform (EMR) (see our briefing on the Government's White Paper and our bulletin on DECC's EMR Technical Update for more information) is that the role and investment case for gas-fired generation has not been adequately addressed.

High wholesale gas prices in the UK (compared to relatively low electricity prices) have brought this issue to the fore recently, resulting in a sharp decrease in the profitability of gas-fired plant. At the same time, there has been a correlating increase in the profitability of coal-fired plant as coal prices, unlike gas prices, have remained relatively stable.

Industry will therefore welcome the acknowledgment in DECC's Call for Evidence that action is needed to ensure that investment in gas-fired plant, gas storage and gas infrastructure does not stall, given that flexible, gas-fired plant will play an important role in the decarbonisation of the electricity generation mix – both as a transition fuel that will help to plug the gap as coal and old nuclear plants close towards the end of the decade, and as peak load capacity to balance the system as the deployment of renewable technologies such as wind and solar (which suffer from intermittency of availability resulting from variations in weather conditions) increases.

DECC also hopes that investors will take comfort from the recent announcement, confirmed in the Call for Evidence, by the new Secretary of State for Energy and Climate Change, Edward Davey, that the level of the proposed emissions performance standard (EPS) will be grandfathered under new legislation, so that plant consented under 450g/kWh standard will be subject to the same standard until 2045. This will bring long term certainty to gas investors, as gas-fired power stations emit below 400g/kWh.    

  1. DECC seeks views on removing investment barriers

DECC anticipates that the Government's EMR proposals will help to improve the investment case for gas-fired generation and states in its Call for Evidence that the Government believes that the introduction of a capacity market "can play a key role in incentivising new gas generation".

To inform further discussion and engagement with the Treasury and stakeholders ahead of the publication of a gas generation strategy by autumn 2012, DECC seeks responses to the following questions by 28 June 2012:

  1. What are the main strengths and weaknesses of gas generation in helping deliver a secure, affordable route to decarbonisation through to 2020 and then by 2050?
  2. What role can gas fired generation play in the future and what level of gas generation capacity is desirable?
  3. What are the key factors driving the economics of investing in new gas-fired power generation and how are these factors likely to change?
  4. What barriers do investors face in building new gas generation plants in the UK? What are the key regulatory uncertainties that may prevent debt and equity investors making a final investment decision in gas generation and supply infrastructure?
  5. Are there any other policy issues that need to be addressed beyond the Government’s proposals for the capacity mechanism and the EPS?
  6. Given a continuing role for gas and the potential for increased volatility in gas demand, to what extent is gas supply and related infrastructure a barrier to investment in gas fired generation? What impact will unconventional gas have on the case for investing in gas generation and the supporting infrastructure?  

The Government has also asked Ofgem to produce a report on the risks to gas supplies and the merits of introducing further measures to address those risks.

It will be interesting to see what Ofgem concludes, particularly since the ancestry of the Government's current EMR proposals can be traced back to Ofgem's Project Discovery.  This culminated in the launch of a controversial consultation in February 2010 in which the regulator arguably strayed beyond its remit by setting out what it perceived to be the policy options for delivering secure and sustainable energy supplies for Great Britain over the next 10 to 15 years (see our bulletin dated 26 February 2010 for more details). One of the policy packages put forward for discussion in Ofgem's consultation referred to the use of capacity tenders for all forms of electricity generation (including gas-fired plant), and the use of tenders to bring forward investment in gas storage and gas infrastructure. However, the previous Government subsequently dropped these proposals, stating that it considered the risk of the gas market being unable to meet demand to be very low (see our bulletin dated 25 March 2010 for more information).    

  1. An EMR update is expected shortly

The Call for Evidence confirms that the Government intends to publish eagerly awaited further information on its EMR proposals "shortly". Legislative powers to facilitate the implementation of the reform proposals are likely to be included an Energy Bill expected to be announced in the Queen's Speech on 9 May 2012.    

  1. Next steps

Interested parties should consider responding to DECC's Call for Evidence, which can be accessed here, and follow future developments closely.